Bulls appear cautious amid BoJ rate hike bets ahead of US data

• USD/JPY is attracting fresh buying on Tuesday, although it lacks bullish conviction.
• A combination of factors is supporting the JPY and limiting the pair’s upside potential.
• Business also appears to be cautious ahead of this week’s important US macro data.

The USD/JPY pair is regaining momentum after the good swings in both directions the previous day and is holding on to its intraday gain around the psychological 150.00 mark during the early European session on Tuesday. However, spot prices remain near a six-week low hit on Monday as increasing bets that the Bank of Japan (BoJ) will raise interest rates again in December. Expectations were raised after the release of a stronger November consumer price index (CPI) for Tokyo last week, suggesting underlying inflation was gaining momentum. Additionally, BoJ Governor Kazuo Ueda said on Saturday that the next rate hikes are imminent as economic data is on track. Ueda further added that the central bank will adjust the level of monetary easing in due course when it is confident or certain that the economy will develop as forecast and underlying inflation will rise towards 2%.

This, combined with the geopolitical risks posed by the intensifying Russia-Ukraine war and US President-elect Donald Trump’s tariff plans, is supporting the safe-haven Japanese Yen (JPY) and capping the USD/JPY pair. In fact, Trump promised to impose high tariffs on America’s three largest trading partners – Mexico, Canada and China. In addition, Trump threatened a 100 percent tariff on the BRICS countries Brazil, Russia, India, China and South Africa if they replace the US dollar (USD) with another currency for international transactions. This continues to fuel speculation that Trump’s policies will spur inflation again and force the Federal Reserve (Fed) to keep interest rates high for an extended period of time, leading to a slight increase in US Treasury yields. However, markets are still pricing in a nearly 75 percent chance that the Federal Reserve will cut borrowing costs by 25 basis points at its upcoming policy meeting later this month.

This further helps keep the USD/JPY pair under control. Investors also appear cautious, preferring to wait for this week’s key US macro releases, including the closely watched Nonfarm Payrolls (NFP) report. Apart from this, Fed Chairman Jerome Powell’s speech will be seen as an indication of the interest rate outlook in the US, which in turn will influence the USD price dynamics and provide significant impetus to the currency pair. Nevertheless, due to the above fundamental backdrop, it is prudent to wait for strong follow-on buying before confirming that spot prices have formed a bottom around the 149.00 level in the near term and positioning for further gains.

Technical outlook

From a technical perspective, the USD/JPY pair managed to defend and recover from the 100-day support of the Simple Moving Average (SMA) near the 149.00 level. The said handle should now act as a key pivot point that, if decisively broken, would be seen as a new trigger for bearish traders. Spot prices could then accelerate the decline towards the 50% retracement level of the September-November rally, around the 148.20 area, on the way to the 148.00 level. The downtrend could extend further towards the 61.8% Fibonacci retracement, around the 147.00 round level, with some intermediate support near the 147.35 area.

On the other hand, any further upside is likely to face strong resistance near the overnight swing high, around the 150.75 area, before the 151.00 round level. Sustained strength beyond this could trigger a short covering rally and lift the USD/JPY pair to the 151.65 region on the way to the 152.00 level. The latter represents the very important 200-day breakpoint of the Simple Moving Average (SMA), which, when finally overcome, will indicate that the recent corrective pullback from a multi-month high has run its course. This, in turn, would shift the short-term bias back in favor of bullish traders.

USD/JPY daily chart